9609 · 5.2.3
Factors affecting the sources of finance flashcards
Revision flashcards for Cambridge 9609 Factors affecting the sources of finance (syllabus 5.2.3). Flip, recall, then mark a real past-paper question.
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Purpose factor?
Fixed assets → loan/leasing; working capital → overdraft/trade credit; start-up → equity/VC.
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Amount factor?
Small sums → overdraft or trade credit; large → share issue or long-term loan.
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Time/duration factor?
Match repayment to asset life — don't use overdraft for 10-year factory.
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Control factor?
Owners wanting control prefer debt; equity brings new shareholders and possible dilution.
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Cost of finance?
Interest on debt; dividends/opportunity cost on equity; arrangement fees.
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Gearing implication?
More debt raises gearing and interest risk — link to 10.2.4 at A Level.
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Availability?
Credit rating, collateral, economic conditions affect whether banks will lend.
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Business size/stage?
Start-ups lack retained profit and track record; PLCs can access capital markets.
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What is the 'principle of matched funding'?
The financial principle that states the duration of the finance source should match the lifespan of the asset being purchased or the period of the financial need.
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How does issuing new shares affect the control of a business?
It dilutes the ownership of existing shareholders, as new shareholders gain voting rights and a share of the profits. This can lead to a loss of control for the original owners.
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Define 'gearing'.
A financial ratio that measures the proportion of a business's capital that is financed through long-term debt. High gearing indicates high financial risk from interest payments.
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Why might a business owner prefer debt finance over equity finance?
To avoid diluting ownership and losing control of the business. Interest payments on debt are also a tax-deductible expense, and no share of the profits has to be permanently given to the lender.
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State two factors that limit the 'availability' of finance for a start-up business.
1. Legal status (e.g., a sole trader cannot issue shares). 2. Lack of a trading history or sufficient collateral, making banks reluctant to lend large sums.